Monday, October 09, 2006

Calls of Note Part 4

- Deutsche Bank is commenting on the possibility of Palm (NASDAQ:PALM) being an acquisition target.

Adding it all up, they think an acquisition of Palm is unlikely, but they cannot rule it out. For the right buyer, with a genuine need for a better software platform it could make sense, but that buyer would have to justify the premium to their own shareholders.

Palm would offer a buyer:A fading, but still highly regarded, product line in the Treo A software design team with demonstrated expertise At least $300 million in tax losses, perhaps more in the hands of alarger company.

At current prices, Palm is within acceptable multiple range of recent transactions. For instance, Motorola recently acquired Symbol for roughly 20x LTM EBIT. As it stands now the firm thinks the company is fully valued, and they have no reason to believe that a deal is imminent. So they are not changing their estimates or rating. Firm cautions investors that even inexpensive' stocks can go down.

They also note that time is not on Palm's side. Or to put it another way, if a deal were to happen they think it would happen sooner rather than later. First, the competitive environment is clearly deteriorating. As RIM demonstrated with its strong guidance two weeks ago, Palm is in line to feel more than its share of the competitive pressure. RIM can at least stand behind its service offering as a barrier to entry, Palm has no such platform. Second, over time a strategic buyer looking for a software fix would get closer to its own solutions. Finally, the company's tax losses are subject to change of control clauses. Since many of these losses came with the acquisition of Handspring, they can be extinguished if Palm is in turn acquired less than three years after that took place.